Surgery Partners Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 12, 2024

There are 14 speakers on the call.

Operator

Greetings, and welcome to the Surgery Partners Third Quarter 2020 4 Earnings Call. As a reminder, this conference is being recorded. At this time, I would like to turn the call over to Dave Dougherty. Please go ahead.

Speaker 1

Good morning. My name is Dave Dougherty, CFO of Surgery Partners. I'm joined today by Eric Evans, our CEO and Wayne Divide, our Executive Chairman. During this call, we will make forward looking statements. There are risk factors that could cause future results to be materially different from these statements.

Speaker 1

These risk factors are described in this morning's press release and the reports we file with the SEC, each of which are available on our website, surgerypartners.com. The company does not undertake any duty to update these forward looking statements. In addition, we will reference certain financial measures that are considered non GAAP, which we believe can be useful in evaluating our performance. The presentation of this information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. These measures are reconciled to the most applicable GAAP measure in this morning's press release.

Speaker 1

With that, I will turn the call over to Wayne. Wayne?

Speaker 2

Thank you, Dave. Good morning and thank you all for joining us today. Before turning the call over to my colleagues, I would like to share highlights of our Q3 financial results and our outlook for the balance of the year. This morning, we reported net revenue of $770,000,000 representing growth of greater than 14% over the prior year quarter. On a same facility basis, net revenues grew 4.2% with surgical case volume growth in the quarter at 3.7%.

Speaker 2

Adjusted EBITDA grew 22 percent to $128,600,000 generating adjusted EBITDA margins of 16.7%, expanding 100 basis points as compared to the prior year quarter. Our results were marginally affected by Hurricane Helene, which impacted several of our facilities and operations in Florida, Georgia and North Carolina as many took precautionary measures in the last week of September. This storm and Hurricane Milton that followed largely only affected the scheduling of cases, but we did have several facilities that sustained damage. At this point, all of our facilities are reopened, but some are only performing limited volume. In the Q3, we continue to see growth in total joint replacements in our ASCs, increasing 53% in the quarter when compared to last year and a 5 year CAGR that's greater than 80%.

Speaker 2

We continue to experience strong and sustained growth in this area as physicians, payers and patients increasingly see the value of performing these procedures in an ASC environment and we are well positioned to capture this ongoing shift into our sites of care. Eric will provide additional insights into our physician recruitment and expansion of our total joint programs in his remarks. Moving to M and A, while we continue to focus on expanding our footprint in existing markets, we've been pleased with our team's ability to enter and grow in those markets that represent the largest commercial and Medicare footprint opportunity, specifically Florida, Texas, California, New York and Illinois. In the quarter, we deployed $24,000,000 on 5 end market transactions. On a year to date basis, 3 of our acquisitions were in our targeted high growth markets of New York and Texas.

Speaker 2

In addition, last week we completed an acquisition of 2 leading multi specialty orthopedic focused ASCs in the Chicago market in partnership with Duly Health, the largest independent multi specialty physician directed medical group in the nation. These ASCs have a demonstrated history of strong operating and financial performance and have a very favorable outlook for high acuity growth moving forward. These new ASCs will join 2 other ASCs we operate in the Chicago market. We're excited about the growth potential of this market fueled by a strong network, Dooly's reputation providing an excellent patient experience and high quality clinical care and execution on our proven growth and efficiency capabilities. Our business development team continues to source a robust pipeline of acquisitions and de novo investment opportunities and we believe the capital deployment aspects of our growth algorithm remain achievable.

Speaker 2

On the strength of these results, we continue to project full year net revenue and adjusted EBITDA outlook of greater than $3,075,000,000 $508,000,000 respectively. This outlook represents at least 13% 16% growth in net revenue and adjusted EBITDA respectively as compared to the prior year. With that, let me turn the call over to Eric to provide additional highlights for the quarter. Eric?

Speaker 3

Thanks, Wayne, and good morning, everyone. We are pleased with our Q3 results with consistent and predictable growth across all our core service lines. Once again, all elements of our long term growth algorithm contributed to double digit top line and bottom line growth. Diving deeper into our results. Same facility net revenue growth was 4.2% in the 3rd quarter comprised of 3.7% growth in surgical case volume and 0.5% rate improvement.

Speaker 3

As we mentioned on our last call, we anticipated net revenue being more balanced between rate and volume on an annualized basis with rate playing a smaller role and volume playing a larger role in the second half of the year, which our results today demonstrated. On a year to date basis, we have reported same facility net revenue growth of just under 9% with growth balance between both volume and rate. On a consolidated basis, our specialty case mix and volumes were mostly in line with our expectations with 163,000 consolidated surgical cases in the quarter with particular focus in our high acuity business lines. Continuing the wave of strong recruiting we've been experiencing this year, over 230 new physicians started utilizing our facilities in the Q3 with a continued focus on recruiting in high acuity areas such as orthopedics, spine and cardiology. This brings our total recruits for the 1st 3 quarters of the year to just over 640 on pace to exceed last year's total.

Speaker 3

The initial volume and average rate per case performed by the 2024 recruited positions exceed the volume and rates from last year's recruiting cohort. As a reminder, each of our recruiting cohorts continue to drive strong compounding year over year growth with our 2023 class generating 126% more revenue in 2024 as compared to the comparable period in 2023. Our recruitment activities accelerating de novo development and acquisitions have continued to fuel our growth especially in musculoskeletal with nearly 194,000 MSK related procedures performed year to date in 2024, representing 21% growth over last year. More importantly, total joint cases in our ASCs continue to grow at a disproportionate rate with just over 50% increase in case volume in the quarter. We do not see this growth slowing in the mid to long term as hip, knee and shoulder surgeries continue to transition into the ASC setting.

Speaker 3

That shift in side of care is in the early innings and we are well positioned with our recruiting team and our portfolio facilities to continue growth in this high acuity space. Moving to operating margins, which improved in the quarter by 100 basis points over prior year quarter to 16.7%. This improvement reflects both our ongoing procurement and operating efficiency initiatives that continue to benefit from our increasing scale along with synergies achieved on our previously acquired facilities. Finally, diving deeper into our capital deployment activities. I am very pleased with the progress that we have made on the M and A front this year, including the acquisitions Wayne just spoke about.

Speaker 3

These acquisitions accelerate our company's growth and together with the de novos in process continue to position us with an increasing number of short stay surgical facilities that are focused on sustainable, long term and high acuity growth. In closing, I'm proud of our surgery partners colleagues and our many talented physician partners for their relentless focus on delivering a superior patient experience with high clinical quality. With the benefit of our collaborative growth oriented corporate teams supporting our unique physician partnership model, I remain highly confident in our long term growth outlook. With that said, I'll now turn the call over to Dave to provide additional color on our financial results. Dave?

Speaker 1

Thanks, Eric. Starting with the top line, we performed nearly 163,000 consolidated surgical cases and 189,000 total surgical cases in the 3rd quarter. These cases spanned across all our specialties with an increasing focus on higher acuity procedures, which is reflected in our double digit growth in MSK related surgical cases. The combined case growth in higher acuity specialties, specific managed care actions and the continued impact of acquisitions supported revenue growth of 14.3 percent over last year to $770,400,000 As Eric and Wayne mentioned, our same facility total revenue increased 4 point 2% in the Q3. We continue to forecast our same facility net revenue growth to exceed our growth algorithm target of 4% to 6% in 2024 with full year same facility revenue finishing in the high single digit range.

Speaker 1

Year to date, our same facility net revenue was 8.7%. Our forecast anticipates net revenue being more balanced between rate and volume on an annualized basis, with rate playing a smaller role and volume playing a larger role in the Q4. Adjusted EBITDA was $128,600,000 for the 3rd quarter, giving us a margin of 16.7 percent in line with our expectations of continued margin expansion. We continue to believe annualized margins will improve by at least 50 basis points over full year 2023. We ended the quarter with $222,000,000 in cash.

Speaker 1

When combined with the available revolver capacity, we had over $815,000,000 in total liquidity. We reported operating cash flows of $65,000,000 in the 3rd quarter. This amount was impacted by the timing of routine transactions involving working capital as well as a marginal impact on collections due to Hurricane Helene. We remain confident in our working capital management efforts and the underlying cash generation from our portfolio. Moving to the balance sheet.

Speaker 1

We have $2,200,000,000 in outstanding corporate debt with no maturities until 2,030. The effective interest rate on our corporate debt is fixed at approximately 6% through March 31, 2025. And after that, we have interest rate caps in place that limit the variable rate component of our $1,400,000,000 term loan to 5%. In the event the interest rate environment becomes more favorable in the future, we will capitalize on such improvements. Our Q3 ratio of total net debt to EBITDA as calculated under our credit agreement was 3.8 times, consistent with prior quarter end.

Speaker 1

As a reminder, this ratio will be impacted in the short term based on the timing of acquisitions, but over time, we project this leverage ratio will be below 3.0 times. Carrying the momentum of our year to date results, we remain optimistic and confident about the company's growth. We continue to project full year 2024 net revenue and adjusted EBITDA greater than $3,075,000,000 $508,000,000 respectively. This guidance implies continued year over year margin expansion consistent with our long term guidance. With that, I'd like to turn the call back over to the operator for questions.

Speaker 1

Operator?

Speaker 4

Thank you. We'll now

Operator

be conducting a question and answer Thank you. Our first question is from Brian Tanquilut with Jefferies. Please proceed with your question.

Speaker 5

Hey, good morning. You got Jack Sullivan on for Brian. Thanks for taking the question. Just to kick off on the free cash front, I just want to make sure I caught all the details there correctly, Dave. So as we understand it, I know you're sort of pulling back from some of the framework that you had laid out on free cash before.

Speaker 5

But if you just think about your broader expectations on cash generation, would you say most of the movement or the weakness in the quarter is due to working capital events that are going to swing back some point in the next couple of quarters? Or if you could just unpack sort of the moving pieces to on the free cash piece both in the quarter and over the next couple, that'd be great. Thanks.

Speaker 2

Hey, Jack, good morning. I'm going to have Dave elaborate on some of the details you asked about. But maybe just to start, we continue to be pleased with our cash flow generation and our opportunities for deployment. But to make sure that we're all aligned, when we think about our cash flow modeling, it's based on a static environment and includes anticipated diligence and integration costs at our commitment to deploy the $150,000,000 to $200,000,000 in M and A. So think about it as it's a static model that assumes that, But we're a growth company.

Speaker 2

And so the pace and size of our acquisitions can impact our cash flow from quarter to quarter or year to year. But we continue to feel good about the cash generated and available to fund both our de novos and our future acquisitions. But to get more specific on kind of the starting point, which is you start with operating and you kind

Speaker 6

of go from there. Dave, do

Speaker 2

you want to elaborate further?

Speaker 1

Yes. Thanks and good morning, Jack. So as you can see, our operating cash flow this quarter or sorry, on a year to date basis now approaches $190,000,000 compared to $230,000,000 last year. The components of that, we did distribute roughly $122,000,000 of that to our partners and our maintenance CapEx remained relatively consistent with what we've been reporting in the past, roughly $30,000,000 or so

Speaker 2

of

Speaker 1

that. So the cash flow, the biggest driver of our cash flow change year over year is what Wayne was just mentioning related to the variable spending on our transaction related costs, which include both the execution costs associated with deals that we executed this year and integration of prior acquisitions that are rolling into our business model going forward. So those variable costs are directly related to the level of spend and you can see that in our reconciliation of adjusted earnings. That level of spend is a little bit less than 2 times what our historical norm is. But having said that, our M and A spend is more than 2 times so far year to date this year.

Speaker 1

But as you did point out, there are typical working capital related activities inside the quarter that will fluctuate from time to time. So those would include things like the timing of when payroll occurs and other accrued liabilities. But we are also experiencing some of those industry related issues that others have talked about related to payer dynamics. Of course, it's a more muted effect on our business because of the way our business runs being primarily scheduled services, which enables us to communicate with payers in advance. Nonetheless, that has an impact, marginal impact inside the quarter.

Speaker 1

And then finally, as we mentioned earlier, the hurricane did impact us in a way, the timing of that hurricane and the geography where it happens to be an area where a lot of our cash and billing experts reside, which is down in the Florida and Southeast part of the country. So we did lose a little bit of cash collection activity just in that last week of September, which put some pressure on it. Some of that we should expect to return. But as I mentioned, the transaction and integration related cost is perhaps one of those variable things that we haven't anticipated. Thanks, Jack.

Speaker 5

Okay. Got it, guys. That's really helpful. And then just a quick follow-up, maybe taking a step back further. One of the things that we've been perceiving a little bit of misunderstanding in the markets around the surgical hospital strategy.

Speaker 5

And so I guess I just wanted to ask maybe taping, taking a step back and it's probably for Eric or Wayne. As you think about sort of what the strategy is with the surgical or physician owned hospitals, Why you like that side of service and how that business has tracked relative to the broader overall consolidated Surgery Partners business? Would love to get a little bit of color on where you stand on those things.

Speaker 3

Sure, Jack. I appreciate the question. First of all, I would differentiate our surgical hospitals from traditional acute care. I mean, our median hospital has a sense of 5, has either 0 or next to 0 ER visits. And so these are very much elective focused facilities.

Speaker 3

We really like them in our strategy because they are ultimately the basis of an ecosystem. So if you think about whether it's orthopedics or cardiology or any number of specialists, it allows physicians to partner with us across the entirety of the acuity spectrum. And so you look at our markets where we have those assets, we build ASCs around them, which allows us to really again cover that full surgical perspective, gives physicians increased autonomy to treat all their patients within our partnerships. And it's been a powerful tool for us. But they are really again, I want to go back to they are a basis to really grow our ASC footprint.

Speaker 3

They're also a basis to allow us to partner in physicians in a more in a deeper way that allows them to cover their entire patient population.

Speaker 5

Got it. Thanks.

Operator

Our next question is from Joanna Gajuk with Bank of America. Please proceed with your question.

Speaker 7

Actually impacted some of the collections and I know there was an add back, less than $1,000,000 to get to adjusted EBITDA for hurricanes, but was there any impact to volumes in Q3 and Q4 for that matter?

Speaker 1

Yes. The impact to from the hurricanes was somewhat marginal, but it did affect a large swath of the Southeast as you know. And the timing of that was not really good for us. It all happened in the last week of the quarter. So there was an impact clearly inside the Q3.

Speaker 1

Some of that will impact our facilities into the Q4. There was only one of our facilities sustained damage and the community was fairly significantly impacted. So we are tracking that one pretty carefully as we go into the Q2. The facility itself is open, but it's on a partial schedule right now. All of our other facilities have reopened and is back to business as normal, but marginal impact on revenue and cases.

Speaker 7

Okay. So it's too small to quantify?

Speaker 6

Yes.

Speaker 7

Okay. So now I guess on volumes, I guess same store cases, this adjusted I guess tracking around, call it, 4% year to date growth. So is this sort of how we should think about going into next year when it comes to same store base growth?

Speaker 1

Yes. Well, so first off, I think it's too early for us to talk about 2025. So I'll just reiterate, how proud we are of what we've been able to produce so far this year, with our same facility rate growth now at 4% on a year to date basis that exceeds our long term growth algorithm that we often talk about of 2% to 3%. So great momentum, great support for our facilities and great organic growth that I'm proud that our facilities are able to kind of achieve. It is too soon for us to look at 2025, but if you look at our long term history on case growth, you'll see, we've constantly been above that long term growth algorithm.

Speaker 7

Okay. I guess somewhat helpful, but I understand you're not ready to talk about MEGSIA specifically. But I guess another question, when it comes to bonuses, your peers have talked about some headwinds from lower Medicaid and self pay impacting outpatient surgeries, but I mean your volume is still pretty solid. So presumably that's not really impacting you as much, this high end of those dynamics?

Speaker 3

Yes, great question. So reminder and this goes back to my earlier comment on our surgical hospitals. We don't have much Medicaid business. We have very little ER business. We are an elective pretty much primarily almost all Medicare and commercial group.

Speaker 3

And so we have not felt that impact and we have continued to grow at a rate that matches our algorithm and consistency we expect.

Speaker 7

Thank you so much for taking the questions.

Operator

Our next question is from A. J. Rice with UBS. Please proceed with your question.

Speaker 8

Hi, everybody. Just another thought on the volume and pricing question. As you see the shift to the higher acuity, the joints and other things, how does that impact the trend for volume versus pricing? Do those procedures generally just take longer surgical time, but on the other hand yield higher revenue. So that may just have a long term impact on the metrics between pricing and volume.

Speaker 8

Any thoughts on that?

Speaker 2

Hey, A. J, good morning. I would start with what you just said, which is clearly these are procedures that require more OR time, but have a higher dollar contribution per minute than other procedures. And so we prioritize those within our facilities where we can. And then obviously, we are able to fill in the time with other lower acuity procedures, but still nonetheless important high margin ones.

Speaker 2

Relative to the growth algorithm, it's simple, right? It's 2% to 3% of volume and it's 2% to 3% of rate. We have a track record of consistently outperforming that. This year, we're close to 9% on the same store basis. We don't see anything changing regarding the growth algorithm going forward.

Speaker 2

And we have generally seen our business model to be agnostic to who's in office because ultimately this is really about a shift of higher acuity procedures into a lower cost, higher quality setting. So I would continue to expect to see it play games with the math from quarter to quarter, but I don't think it will play games with the math on a year over year basis.

Speaker 8

Okay. The only question, I know we spent a little time talking about the hurricane impact. Some others are calling out the impact on the supply chain, IV bags, etcetera, etcetera. Did that any of that have an impact on you or do you expect it to in the Q4?

Speaker 1

Yes. Thanks for that question. Clearly, it's something that we track. You're talking about the facility that Baxter had in North Carolina that did impact liquids. We clearly I mean, I'm really proud of our procurement team.

Speaker 1

I got to say, we were on top of it kind of right away. And I'm happy to say that we have not canceled any cases, as a result of that shortage. We got on it pretty quickly. Part of the benefit of us having a portfolio of companies across country and a variety of different supply chain partners that kind of sit behind it. And as we sit here today, we're not anticipating having long term pressure.

Speaker 1

We're starting to see that somewhat abate. So combination of the inventory that we had on hand, both at our facilities and as our backstop and our great partnership with many of our providers has allowed us to kind of weather that storm as it were. So it was a great question. Thanks, A. J.

Speaker 8

All right. Thanks a lot.

Operator

Our next question is from Andrew Mok with Barclays. Please proceed with your question.

Speaker 9

Hi, good morning. I just wanted to clarify expectations around free cash flow for the year. I think you said you're pleased with the cash flow generation, but also noted higher transaction costs. So it's less clear to me whether we should still be thinking about the $140,000,000 to $160,000,000 free cash flow target for the year. Is that still achievable?

Speaker 9

Thanks.

Speaker 2

Hey, Andrew, thanks. I think the thing that we were trying to point out to folks is just to recognize that the static nature of our cash flow modeling does not reflect the dynamic nature of when capital is actually deployed, which is why we have moved away from that free cash flow metrics. So in this current year, we're 2x on M and A deployment. And so ultimately that means we're doing more integration and more diligence. So backing into a static model is one thing, but in a dynamic model, we're in a point where we're saying, look, providing that number to no longer provides value.

Speaker 9

Got it. That's helpful. And then if I look at the G and A line in the quarter, it looks like it was down about $11,000,000 or nearly 30% sequentially. Can you give us more color on what's driving that G and A lower? Was that planned or in response to some of the challenges from the hurricanes and things of that nature?

Speaker 1

Yes. So as a reminder, kind of our 2nd quarter G and A did have a stock based compensation true up of about $8,000,000 We talked about in our call last quarter. So if you normalize for that amount on a full year basis, our Q3 G and A expense is in line with our expectations. Thank you.

Operator

Our next question is from Tao Teo with Stifel. Please proceed with your question.

Speaker 4

Hi. This is Tao Teo from Macquarie. Thank you. And I'm just wondering if you guys have any comments on the final Medicare ESE payment rule. In particular, we noticed that not many procedures were added to CPL this year.

Speaker 4

Any potential regulatory changes under the 2nd Trump presidency? Remember, on the this first term, CMS made the decision to phase out the IPO list. Do you foresee kind of acceleration in terms of size shift in the 2nd term? Thank you.

Speaker 3

Yes, thanks for the question. So there was you're right, there was not a lot of change to the list this year, although again, the key growth drivers for us have been added in recent years and there's a long way to go on those. So I would just say we're pretty pleased with the overall Medicare update. And certainly that's been a nice thing well above our normal algorithm, so pricing has been nice. But as far as the list goes, no real surprises and we've got tons of room within the procedures that are there.

Speaker 3

I would say to your election question, look, the good news about our space is it's been a favorite of both administrations because of the tremendous value we create. We don't expect that to change. You are right noting that last time the Trump administration was in, they wanted to eliminate the inpatient only list. We'll see where that goes. But again, I would say the biggest opportunities for us are already within our realm and we're already executing on them.

Speaker 4

Great. And second clarification question. So D and A expense step up $15,000,000 from the quarter. I think it's probably related to the $220,000,000 acquisition done in the Q2. But anything else that's contributing to the higher step up this quarter?

Speaker 1

In the You're talking about G and A expense?

Speaker 4

No, D and A, depreciation and amortization.

Speaker 1

Yes, that's the introduction of new assets that have joined our portfolio in the past 2 years. So that would be driving most of that increase.

Speaker 4

Okay, got you. Thank you.

Speaker 6

Yes.

Operator

Thank you. Our next question is from Matthew Gillmor with KeyBanc. Please proceed with your question.

Speaker 5

Hey, thanks

Speaker 10

for the question. I wanted to ask one on physician recruitment. It seems like you're maybe running a little bit faster this year in terms of just new doctors joining the platform. Curious if that was the case and if you had any comments in terms of how we should think about the maturity of those physicians as they come onto the platform, how long it takes for them to migrate their business over to your facilities?

Speaker 3

Yes, Matthew, thanks for the question. Yes, we're very pleased with our recruitment this year. It is on pace to be a record year and ahead of last year. I would say every year we get a little bit more mature in this place. We use a lot of data to drive our targeting.

Speaker 3

And I'd also say those higher acuity specialists that can now use our facilities are more and more aware of the benefits and the great quality we can provide, the opportunity for them to participate with us in creating value for the health system. So that does seem to be a place where we're continuing to gain momentum. Your question around as we recruit them, we mentioned in our prepared remarks how much the last cohort is up. We typically see after year 1 that group to double or more in the 2nd year and that growth continues through year 3 and 4. And so, it is a compounding effect.

Speaker 3

So, certainly, we're excited about this class. We're excited about how much of this class is high acuity. And we continue to be a very, very attractive place for physicians, especially physicians who want to remain independent, but in particular physicians who want more control, better lifestyle and the ability to create a lot of value for both their patients and the health system.

Speaker 10

Great, thanks. And then as a quick follow-up with the election last week, there's been, I think some just focus with the acute care hospitals at least on what happens with the exchanges and the enhanced subsidies there. I was curious if you could kind of characterize your exposure to exchanges. My sense was it was pretty limited, but just would be great to hear your perspective on that.

Speaker 3

Yes. No, it's a great question. It is relatively limited. But I would say that I think we're not going to predict where that's going to go with the administration, but it's relatively limited. But we are well positioned obviously in that place to deliver a high value product and no matter kind of how they structure.

Speaker 3

And so we'll be watching that carefully, but don't anticipate that's anything material.

Speaker 10

Great. Thank you.

Operator

Our next question is from Sarah James with Cantor Fitzgerald. Please proceed with your question.

Speaker 11

Thank you. You've talked a lot today about lumpiness and timing of cash use for growth and also general needs like payroll. And I'm wondering with that in mind, if we're thinking about the broader threshold of what level you can consistently operate at for free cash flow to self fund growth, is it really not the $200,000,000 that I feel like The Street was have their mind at, but something higher like $250,000,000 or $300,000,000 just to account for the lumpiness in use of cash?

Speaker 1

Yes, I'm not following, Sarah, the $200,000,000 to $300,000,000 But I will tell you based on everything that we've modeled and based on the strength of our balance sheet that we have no concern over our ability to fund M and A on a go forward basis, even with the experiences that we've been seeing so far. So our modeling over the next 5 years would suggest that the use of our total balance sheet liquidity is sufficient such that at the end of that 5 year period, we end with leverage below our 3.0 target, nothing on the revolver and strong cash flow generation. So at this point, our growth algorithm does not need to change whatsoever. We feel really confident as

Operator

we sit behind that and

Speaker 1

that is inclusive of that inorganic growth lever that's out there.

Speaker 12

Got it. I'm wondering if you could clarify, are there any moving pieces that impacted revenue per case this quarter?

Speaker 1

Yes. So as we mentioned, I think on our last call, our same facility rate growth was going to be impacted by the mathematical equation of how the same facility growth. So I'm just going to remind you kind of and as we've talked about before, I don't want us any one of us to over index on same facility cases or rate in one particular quarter. So we tend to look at it on a longer term basis just so it normalizes for some of these unusual variances that the calendar can have on our calculation that kind of sits behind there. So I reiterate the fact that we're at 9% or just about 9% on a year to date basis on our same facility with contributions coming from both sides of it.

Speaker 1

Now in the Q3, our same facility rate was exactly in line with our expectations. And if you remember, in line with what we had mentioned on our Q2 call, the case growth that we saw inside the quarter was strong, and it was from the predictable calendar that favored the return of higher volume about relatively lower acuity procedures in GI and ophthalmology. So just the math of that, Sarah, is going to drive some pressure on the rate side, which is how you can see that coming through. However, as we talked about at the very beginning of the call, we have seen a 50% growth in our total joint replacement procedures. Those are high acuity.

Speaker 1

So that kind of is underlying the rate that you're seeing. So you'll still be impressed when you look at the overall net revenue per case that the company is producing. But the way the same facility calendar works inside a quarter, it will just produce those kind of odd results. It will continue to do so in the Q4, but again, that's nothing new. It's everything that we predicted and it has come through.

Speaker 1

So on an underlying basis, we're very, very proud.

Speaker 12

Thank you.

Operator

Thank you. Our next question is from Bill Sutherland with The Benchmark Company. Please proceed with your question.

Speaker 13

Thanks. Thanks for taking the questions, guys. Eric, I wonder if you could touch on cardio for a second. I've been hearing about EPIC procedures picking up a lot. And just wondering how that's if you could provide some dimension on how that fits into your case mix now?

Speaker 3

Yes, Bill, thanks for the question. And you've heard me talk about cardio a couple of times. I would start with just saying we're excited about the future of cardio. It is cardiac procedures and their ability to move into the ASCs safely. So that's stuff like you mentioned EP, cardiac rhythm management.

Speaker 3

Those procedures in particular are easier to move into our facilities, don't require a cath lab. Over 70% of our facilities have fluoroscopy to do those procedures today. And so we've talked a lot about we're trying to add 5 to 10 facilities a year that add that capability. Again, we see this as probably one of our fastest growing service lines, albeit on a small end. So we expect that to be a rapid growth.

Speaker 3

I do think there will come a time where it will turn the corner much like we saw in orthopedics, but it's a highly employed specialty. And Bill, as you know too, a lot of these docs, they haven't historically practiced in ASCs and so there is a little bit of a learning curve, but we're working through that. We do have a lot of interest in the area, but again small end, rapid growth, we expect it to be really kind of being a rapid curve over the next several years, but somewhat muted by the fact that it's the most heavily employed specialty and also certain states have caught up with CMS yet. But we're excited about it, Bill. We do see it as a kind of the next big wave if you think about after orthopedics, but we're still in the early innings there.

Speaker 3

So both opportunities are fantastic.

Speaker 1

Yes. And Bill, let me just I'll add on to that real quick to just say another point of reference. Much like what we saw in the orthopedic side, we're getting ready for it as a company. So we know a lot about it. We know what's kind of driving it, but 70% of our facilities are capable now of doing cardiac opportunities.

Speaker 1

So we've been positioning the company for when this opportunity does manifest.

Speaker 13

Great. And then, I was looking back at my notes on the de novo, where you stand with fully syndicated launches and maybe update us on where they fall into the calendar now and the mix of consolidated and minority interest partnerships?

Speaker 1

Yes. Bill, great question. De novos for us is that lever that we're really excited about. It's been a growth lever for us with a target of doing 10 de novos over the course of or at any given year, I think we're going to have de novos kind of in the pipeline. And so far, since we've been doing de novos, we've opened 17 and over the past year, we've opened 5 this year with a couple more we think are going to happen in the next 6 months or so, 6 by the end of 2025.

Speaker 1

Most of these de novos are going to be in minority interest, that's how they start with an opportunity at some point in the future for us to move into a consolidated framework. But I will remind you the economics of a minority interest investment for us, even though they don't consolidate, still favorable for us. They are the best use of capital relative to M and A, really low cost of capital for Entry Point. If you can kind of tolerate the amount of time for us to bring in, we'll get the minority interest earnings, but we'll also get management fees as that facility continues to grow. So the economics of these de novo is a very favorable for us.

Speaker 1

No change right now in our long term approach to doing 10 de novos every year.

Speaker 13

Got it. Thanks, Ted.

Operator

Thank you. Our next question is from Benjamin Rosa with JPMorgan. Please proceed with your question.

Speaker 6

Good morning. Thanks for taking my question. On M and A, you mentioned the Chicago deal in the opening comments. Just curious how you're approaching capital deployment, where you see the pipeline as we wrap up the year and whether you consider yourself in a more opportunistic position at this point for targets that align strategically with your pursuit of higher acuity procedures?

Speaker 3

Hey, Ben. Thanks for the question. I'll start with saying as we've always said that M and A is fickle and the timing can be obviously difficult to predict. But as you mentioned the Dooly acquisition, we're very pleased with what we've added to our portfolio this year. It reflects a redeployment of capital for assets that we divested last year along with over $200,000,000 of incremental capital being deployed, which is obviously with our growth profile.

Speaker 3

We're obviously not providing guidance in 2025 as far as the future outlook of what we're going to do with capital. So I'd caution getting ahead of that. But to your point, we've always been opportunistic. And so that continues to be our position. We're well positioned to continue to grow high acuity procedures.

Speaker 6

Got it. Thanks. And just on the buy up opportunity, can you remind us of your buy up opportunity on your current book? And then are you seeing any change in physician behavior regarding potential buy ups on a stronger volume environment?

Speaker 3

So we always look for buy up opportunities across our portfolio. There's not a ton of those. Although they will grow as we grow our de novo pipeline as what Dave was talking about. There continues to be opportunities as those mature. Every year, we look at those opportunities.

Speaker 3

We have to balance that with having physician commitment and buy in. And so we are always kind of opportunistic on that side as well. But it's not a huge opportunity in our current portfolio as we consolidate the majority of our facilities.

Speaker 1

Yes. I know it's frustrating for those that have to kind of model what our revenue looks like, but we have mentioned before, we're kind of agnostic to whether it results in a consolidation criteria for us or not. As Eric mentioned, it's a we need to make sure there's a healthy mix between the physician ownership model that's really what drives the natural business model that we have. And it's that syndication opportunity is ever present in every one of our deals. But it's not going to be driven off of a desire to get to consolidation.

Speaker 1

It's going to be driven off of the long term sustainability of each one of our facilities. Thanks, Benjamin.

Speaker 6

Got it. Thanks for the color.

Operator

Thank you. Our last question is from Ryan Langston with T. D. Cowen. Please proceed with your question.

Speaker 2

Hey, this is Will on for Ryan. Most of my questions have been asked, but I guess I would just ask kind of on the long term outlook for physician recruitment. Are you seeing anything new in terms of shifting preferences for these physicians to work in your environment versus employed or hospital? Thanks.

Speaker 3

Hey, Ryan, great question. I would say in general, it's very stable. We continue to have strong interest as you can see in our recruitment numbers, mostly because we provide an opportunity for them to be more efficient with their right? We provide more like a time machine that allows them to have consistent scheduling, allows them to get more procedures done, and gives them a chance to have more say in their practice. I do think there's a lot of surgeons who are frustrated with the current system and how much time they end up having to spend on things that they don't see as efficient and we're an answer to that, right.

Speaker 3

We continue to be an answer to that for independent physicians and we haven't seen that kind of wane at all. Thanks. Okay. So appreciate all that right questions. I think that was the last question.

Speaker 3

I'll go ahead and just wrap up. Before we conclude, I would like to say on behalf of our entire

Speaker 2

management team, thank you to our colleagues that partner with our physician partners each

Speaker 3

and every day. Team, thank you to our colleagues that partner with our physician partners each and every day to deliver on our mission to enhance patient quality of life through partnership. And I want to thank you all for joining our call this morning. Hope you have a great day.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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Key Takeaways

  • Surgery Partners reported Q3 net revenue of $770.4 million, up 14.3% year-over-year, same-facility revenue growth of 4.2%, and adjusted EBITDA of $128.6 million with a 16.7% margin, a 100 bp expansion.
  • Total joint replacements in ASCs surged 53% in Q3 (over an 80% five-year CAGR), underscoring the accelerating shift of high-acuity procedures into outpatient settings.
  • Over 230 new physicians began using the platform in Q3 (640+ YTD), focusing on orthopedics, spine and cardiology, with the 2023 recruitment cohort generating 126% more revenue in 2024 versus the prior period.
  • The company deployed $24 million on five transactions in Q3—including two orthopedic ASCs in Chicago with Duly Health—and maintains a robust pipeline of de novo and acquisition opportunities in its key markets.
  • Management reaffirmed full-year 2024 guidance of >$3.075 billion net revenue and >$508 million adjusted EBITDA (+13% and +16%), while ending Q3 with $222 million cash, $815 million liquidity, and net debt/EBITDA of 3.8×.
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Earnings Conference Call
Surgery Partners Q3 2024
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